Some common financial mistakes in divorce and how to avoid them
For many couples, the decision to file for divorce can be not only emotionally taxing, but also financially stressful. In some cases, the desire to end the process as soon as possible leads people to make financial mistakes that they otherwise would not make. Below are some of the most common financial mistakes that couples make during divorce proceedings and some tips on how best to avoid them.
First, many couples assume that they are better off doing everything they can to keep their marital home. In some cases, this is not the best course of action. The assumption, of course, is that the marital home is the most valuable asset a couple can possess. The reality is, however, that homes can be expensive to maintain and, particularly over the past few years, real estate has not retained its value as dependably as in previous years. Indeed, in many cases, it may be better to view retirement accounts as more important marital assets.
Second, couples should take steps to ensure that they understand the tax implications of dividing assets held in 401(k)s, Individual Retirement Accounts and other retirement planning vehicles. For pre-tax accounts, federal taxes are paid when funds are withdrawn during retirement. Withdraws from some other types of accounts, however, are not taxed. Depending on what types of accounts couples have used to save for retirement, accepting the same amount of money held in a particular vehicle may not be as valuable as that held in another vehicle.
Third, couples should also understand what opportunities they have to withdraw funds from their retirement accounts. For those under 59 years old, the federal government allows divorcing couples to withdraw money from a 401(k) or 403(b) without paying the normal 10 percent tax penalty. The withdrawal must, however, be required by a qualified domestic relations order, also known as a QDRO.
More than anything else, divorcing couples should realize that proper planning is an important part of the process. In some cases, decisions couples make during divorce can make all the difference in determining when they can retire. While it is understandable that couples would want their divorces to happen as quickly as possible, that should not mean that they should overlook possible advantages and disadvantages of dividing property in particular ways. Consultation with an experienced divorce lawyer is essential for divorcing spouses to protect their retirement assets long-term. For more information, couples contemplating divorce should talk to a family law attorney today.